Europe's Increasing Tariffs Challenge U.S. Apparel Makers

Shortly after Randa Allen began her contemporary sportswear line, Notice Inc., the Los Angeles designer started exporting to Europe.

She began nearly three years ago with a small store in the Marais district of Paris and then moved on to a small retailer in Dublin, Ireland. Sales have been decent in the two stores, according to Allen, who said she would like to expand her presence in Europe, where California style is a growing trend.

But the European Union is slapping a 7 percent tariff on 44 categories of U.S.-made goods in retaliation for an export subsidy given to U.S. manufacturers that the EU claims is unfair. In June, that tariff will rise to 8 percent.

Until the U.S. Congress repeals the subsidy, tariffs against all U.S.-made goods, including apparel, will go up 1 percent each month until tariffs reach 17 percent in March 2005. The tariff clock started ticking on March 1 with an initial 5 percent tariff that increased to 6 percent in April.

Manufacturers such as Allen are giving a slight break on wholesale prices to their European customers. But if the tariff keeps going up, it will cut into the bottom lines of clothing manufacturers keeping European accounts.

“Most of the time, we do a 10 to 15 percent discount to help with those customers overseas,” said Allen, whose dresses retail for about $168.

Delaying decisions

Many California manufacturers have not figured out what they will do with their European accounts when they start shipping their Fall and Winter collections this summer.

“We are just trying to get a handle on it, but it will definitely affect us,” said Star Collins, the director of fulfillment at Baby Lulu Inc., a $10 million childrenswear manufacturer in Commerce, Calif.

The company was hoping to grow its 12-year-old highend childrenswear company by exporting to countries including Australia, Japan and Europe. The company has a new distributor in England who will be selling to the rest of Europe. “Honestly, we haven’t made a game plan yet,” Collins said.

Costa Mesa, Calif.–based Paul Frank Industries Inc. exports its whimsical fashions overseas to countries such as Greece, France, Norway, Italy, Spain and the United Kingdom. Paul Frank executives will be discussing the matter with distributors in July at the company’s headquarters, said Ryan Calvert, who works in international sales.

Meanwhile, other manufacturers are toughing it out.

“This is seriously impacting trade between the United States and the European Union,” said Michael D. White, editor of Los Angeles–based online newsletter CalTrade Report.

The principal losers in this trade war have been companies selling big-ticket items with price tags in the thousands and millions of dollars, such as American aircraft businesses and automobile and motorbike manufacturers. “Boeing was impacted by this, and they have a major facility in California,” White said. Harley-Davidson Inc. has also been impacted.

Legislative solution

On May 11, the U.S. Senate passed a $170 billion package of corporate tax cuts that includes provisions to head off a trade war with Europe. Part of S. 1637, approved by a 92–5 vote, would repeal the $5 billion annual tax break for U.S. exporters, which the World Trade Organization declared was an illegal export subsidy.

The matter must now be taken up by the House of Representatives under H.R. 2896, which has a number of amendments attached to it. The House will not discuss the bill until after Memorial Day.

Several amendments might have to be cut to get the measure passed quickly. The House and the Senate versions of the bill will have to be combined and approved before President Bush will sign the bill.

A weak dollar is making U.S. exports more attractive in countries whose currencies float freely. That is true in Europe, where the dollar’s value has declined dramatically—from 84 cents in September 2000 for one euro to about $1.20 now.

“We don’t want to see this 17 percent tariff layered on during 2004 and undo much of the benefit we have been seeing,” said Pat Mears, a spokeswoman for the National Association of Manufacturers in Washington, D.C.

Kevin Burke, president and chief executive of the American Appare l & Footwear Association in Washington, D.C., noted the EU tariffs are encouraging those with non-U.S.–based export operations to service the European market through those operations. He observed that companies have been absorbing the additional costs but said that can only go so far.

Apparel manufacturers agree.

“The retailers are complaining that with these added tariffs, the prices are getting pretty heavy,” said Kerry Jolna, president of Bella Dahl, a high-end blue jeans manufacturer in Tarzana, Calif., that entered the international market more than one year ago. European sales now make up 5 percent of the company’s revenues.

“So what they are doing is coming to the manufacturer and asking for discounts,” the blue jeans executive said. “In some cases they get it. We pretty much stand our ground.”

Dov Charney, chief executive officer of American Apparel LLC, the Los Angeles T-shirt company that promotes itself as a sweatshop-free operation, has been expanding rapidly in Europe with stores in London, Berlin and Frankfurt, Germany. He is hoping to open a Paris store.

Charney said he is not reducing the price of his T-shirts, which retail for $15 to $25. But tariffs are not helping the matter.

“The U.S. government, if they are serious about free trade, should open up Europe so we can sell more California apparel,” Charney said. “Right now, the currency fluctuation helps our profitability, but it would be easier if there were no duties.”